September 23, 2009

In his weekly radio address on Saturday, President Barack Obama said that "we cannot allow the thirst for reckless schemes that produce quick profits and fat executive bonuses to override the security of our entire financial system and leave taxpayers on the hook for cleaning up the mess." A day earlier, Treasury Secretary Tim Geithner told the New York Times that "you don't want people being paid for taking too much risk."

So now the administration wants to control the pay of employees of banks and Wall Street investment firms.

Kenneth Feinberg, the administration's "pay czar," is being tasked to oversee employee compensation at firms that took bailout money from the government's Troubled Asset Relief Program (TARP). The Federal Reserve will require thousands of bank holding companies and state banks to submit their compensation plans for approval.

The administration has it wrong. It wasn't reckless schemes and excessive risk that sunk banks and Wall Street; it was excessive leverage. And thanks to cheap money and twisty regulations, risk was extremely undervalued. Banks owned huge portfolios of real-estate loans and mortgages specifically because they, and regulators, didn't think they were taking much risk at all.

Outlaw pay and pay will only go to those outside the reach of the law

Populist pay limits are squarely aimed at Wall Street, not local banks, yet for the most part Wall Street doesn't take much risk. Highly profitable investment banking and sales and trading are agency businesses, doing work for customers for a fee. Of course bad trades happen, and there are the rare rogue traders like Barings' Nick Leeson, who hid losses and sunk the firm, or Jérôme Kerviel, the young trader who lost $7 billion for the French bank Société Générale. But Wall Street firms are quite good at managing day-to-day trading risk.

September 14, 2009

Part of the charm of Wall Street, and what scares most reasonable people away, is that it is as close to a meritocracy as exists on this earth. It's dog eat dog. It's sink or swim. You do a trade and it makes money, then you're a hero (for a moment anyway) and deserve a bonus. You bring in a deal, you get paid. You lasso more clients' assets under your firm's roof, you're a hitter. I once discovered some good news on the stocks I followed before the rest of the Street, and mentioned it to the sales force at a morning meeting and moved markets in New York, Tokyo and London. I had the head of global equities pat my head on the elevator ride up the next morning. Pat my head! I was told he never does that.

The flip side, of course, is what makes Wall Street so dangerous. You lose money for the firm and you're a heel. Do it again and you don't get paid that year. Do it a third time and you're out of a job. Just like that. Gone. I've seen it happen to friends and acquaintances at just about every firm up and down Wall Street. There is no tenure on Wall Street, no job security, no long-term guarantees. Ten- and 20-year careers end in a flash. Happens all the time, and everybody who works in the business knows this.

That's one reason why everyone is paid so well. Think of it as combat pay. But the other reason compensation is many, many multiples of the average wage in this country is that trading stocks, doing IPOs, merging companies, managing money is a very lucrative business. Not everyone can do it. It looks easy, football-field-sized trading rooms jammed with adrenalin-rush maniacs sitting in front of huge LCD screens. It might as well be a call center in Mumbai. But it's hard. Really nasty hard. Wall Street hires in that 99 percentile zone. And then they make your life miserable hoping you'll quit before they break you. Or hoping they break you before you lose money for the firm. It's not WalMart or General Motors or even Pfizer or Intel. It's trial by fire.